What is an RRSP, and why should I contribute to one?
"RRSP" stands for Registered Retirement Savings Plan and is a government-regulated account designed to help Canadians save for retirement. The RRSP was created way back in 1957 by the Canadian Government and has been an incredible way to help Canadians invest and grow their money in a tax-efficient manner.
The annual RRSP contribution limit is 18% of your earned income, up to a maximum of $29,210 for 2022 (the maximum generally increases yearly to help account for inflation).
RRSPs enjoy two major tax benefits as compared to investments in a normal "cash" account:
Tax-Deferred - When you contribute to your RRSP, you receive the income tax you had paid on your income upon filing your taxes. For example, if you contributed $10,000 to your RRSP and are in a 30% tax bracket, you would receive ~$3,000 back from the government.
Tax-Advantaged - The contributions to an RRSP can be invested in several different securities, including stocks, bonds, mutual funds, ETFs, and so on. All of Kinsted's Private Pools also qualify for RRSP investment. Normally, growth in these investments (capital gains, dividends, and interest) is taxable if invested in a basic Cash account. However, investments in an RRSP continue to grow tax-free, which is why it is important to set one up early and contribute as much as you can.
The fact that RRSPs are both Tax-Deferred and Tax-Advantaged means they are ideal for their prescribed purpose: putting money away for retirement. The funds that you put away earlier in life can then be invested responsibly and grows to provide for your retirement needs.
What are the disadvantages?
An RRSP is used to save money for retirement, which means you should put it away with the intention of not touching it for a while. Every time you withdraw from an RRSP, you will have to pay tax on that withdrawal, and as such, it should be taken out only once you have stopped earning an income or in case of an emergency. This makes them relatively inflexible investment vehicles, and special care should be taken to ensure that you are confident that you will only need to take money out of your RRSP once you have stopped earning income.
How do I get my money out?
There are two main ways to take money out of an RRSP. The first is a general withdrawal that is taxed as income in the year you take it out, and it is highly recommended not to use your RRSP as a checking account.
The second (and main) way to get your money out of an RRSP is to convert it to a Registered Retirement Income Fund (RRIF). This can be done anytime in your life; however, it automatically converts at the end of the year you turn 71. Once it becomes an RRIF, there is a minimum amount you must take out every year to help pay for your retirement lifestyle. This amount ranges from 5% at age 70 to 20% at age 95, and we do not recommend converting to an RRIF until you have retired and are in need of a stable income.
How do I set up an RRSP and get started saving?
Get in touch with one of our Wealth Counsellors to find out how you can invest your money with Kinsted Wealth and take advantage of our unique investment platform.
Q1 Outlook, and Beyond